By Bill Pritchard, President & CEO
The insurance industry has long worked to create streamlined distribution for products considered to be commodities. Those where the product itself was basically the same, with the only difference being the carrier offering it and the price. We have seen this in personal lines for some time with the rise of direct to consumer giants like Geico and Progressive. We are now seeing the concept of “commodity products” beginning to invade the Excess & Surplus marketplace. While there are certainly commodity products in insurance, there are not any in the environmental sector for a number of reasons. Just as a craft beer is a carefully thought out product, with no two breweries offering an identical brew, the environmental insurance industry is built on uniquely constructed policies, with no two being exactly the same.
The foundation of the commodity approach has long been admitted insurance products that are carefully regulated by the state. In any given state, the insurance department creates the acceptable standard of coverage for each class of business admitted carriers offer, and require all insurance policies to meet those standards. For that reason, an auto policy, whether for a person or a business, has to be the same as every other auto policy offered to the same type of insured by an admitted carrier. To be sure, companies create modest coverage tweaks to try to set themselves apart, but those too must be approved by the state. This gives the consumer of those products the security that at the very least the underlying coverage between the two products is the same.
If form is not a significant distinguishing feature, provenance should be. The insurance carrier that provides coverage matters greatly in the calculus of value. What is the company’s financial rating? Are they “under review” with either negative or positive implications? What is their history regarding service, claims payment process, and the many other aspects that impact the value of the promise made by the policy? Unfortunately, few agents do a good job of defining this value for their clients. Too often the AM Best rating is provided, with no explanation of meaning, and used to define the “quality” of the product. While certainly a component of it, it is by no means a complete picture. As these carriers are admitted companies, and the form is reviewed and approved by the state, so too is the financial security of the company guaranteed, in part, by the state guaranty fund. Sadly, this is a worst case partial protection for the insolvency of the carrier, and has nothing to do with the company’s ability to service and support the product sold.
In the commodity marketplace, price then comes to the forefront as a differentiator. In the vast majority of commodity insurance products, price is advertised front and center in the largest font. The concept is that if the state has approved the form, and they are all pretty much the same, and the carriers providing the quotes are all equally wonderful, and at the very least protected by the guarantee fund, then price is really the only difference. This is true in the mass market beer industry as well, with taste and flavor taking a back seat to cost.
While on some levels this works for standard lines admitted business, it does not work for Excess & Surplus products for two simple reasons. The first is that, by their very nature, Excess & Surplus products are not reviewed and approved by the state. The Excess & Surplus industry exists to give the insurance industry the ability to craft unique coverages for risks who need insurance that standard markets cannot, or will not, provide. And because these products are inherently unique, there is no commonality of coverage from one product to the next. While there may be similarity in name and general intent, the details are not the same. The second is the financial review and security of the carrier. Excess and Surplus carriers are not required to be reviewed by the state, and are not subject to the guarantee fund. To be clear, all carriers have a home state, and in that state the insurance company is admitted, and is covered by that state’s fund. But in the states where that carrier offers Excess & Surplus products, they are not.
The environmental industry is a perfect illustration of the power of this concept in insurance. Built in response to increasing environmental regulation and standard carrier distaste for the risk, the environmental insurance industry has been a huge contributor to corporate responsibility for the environment over the last thirty years. In the neighborhood of a three billion dollar part of the insurance industry, environmental policies have funded clean ups well into the hundreds of millions over the years. Without this creative, diverse group of carriers creating responsive and reasonable products, those costs would have fallen on taxpayers. The vast majority of environmental insurance remains written in the Excess & Surplus market.
When markets and brokers treat these products as commodities, they are really exhibiting their lack of understanding about how these products actually work. Perhaps the most glaring error commonly made is the assumption that all policies are the same. As mentioned previously, insurance policies offered by Excess & Surplus are not subject to review and approval by the state in which they are written. While many policies share the same title, Contractors Pollution Liability or Products Pollution Coverage for example, the fundamental language is unique to each carrier. Certainly there are commonalities here and there, but the core coverage parts are often very different. The definitions and exclusions are never exactly the same. The terms and conditions are unique to the carrier offering them. What this means is that in the face of the same claim, these policies will potentially respond differently. As our example earlier explained, the first fundamental component of something being a commodity is that the various policy forms are virtually identical. Without the state requiring coverage to be written in a specific way, there is little commonality here.
The next distinction is with regard to the carriers offering coverage. Again, as stated earlier, companies writing policies in the Excess & Surplus market are not protected by a state’s guaranty fund. The most commonly used measure of security in the industry today is AM Best Rating. As insurance professionals know, there is nuance to a rating. It can be under review with either positive or negative implications. The financial size category is important as well. In the absence of protection of a guaranty fund, a staple of all admitted carriers, an understanding of a carrier’s financial strength is very important, and sets companies apart from each other.
In addition to financial considerations, in Excess & Surplus lines, the ability of the company to service the business and manage the inevitable claims is very important. Large standard lines carriers have entrenched claims handling systems as they often write thousands of similar policies a year. Environmental carriers are different, as the “pollution” aspect of a claim is a very different beast than a typically casualty claim. Understanding a carrier’s capabilities in these areas is crucial in deciding if a carrier is an acceptable market for an insured client or not. Again, this is not a commodity type decision.
People who truly understand how environmental insurance policies work agree that price needs to be the last evaluation point, not the first. Determining if the policy offered provides the correct coverage for the client and allows them to transfer the risk is a first consideration. Does the carrier have the support and security that the insured expects and needs is the next. An insurance policy is a promise on a piece of paper, and the security and integrity of the party making the promise is critical. Only then should an insured review the relative costs of all of the products they’ve seen that meet the first two hurtles to acceptability.
Environmental insurance policies cannot be treated as a commodity because they are not. They are unique policies crafted by unique carriers, and no two are alike. As craft beer is different than beer produced by the major brewing houses, environmental insurance is a unique combination of coverage and carrier created in a framework that does not allow the assumption of sameness. A consumer needs to make the choice the same way, giving careful consideration to the important components, whether those are taste and coverage, aroma and claims handling, or any of the other determining factors of a great beer and quality coverage.